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Subsidies: What Fossil Fuels & Porn Have in Common

This article was originally published on RealClearScience.

It’s time to end the federal porn subsidy.

You might be asking, What federal porn subsidy? Fair question. Technically, there isn’t a federal porn subsidy. However, if we borrow some of the logic commonly used by politically driven economists, we can redefine the word subsidy to mean whatever we want.

Pornography is enjoyed by many people, but it comes with a very real social cost: it can break up families and perhaps even become an addiction, which are profound losses of productivity. Economists refer to these as negative externalities — i.e., bad side effects that affect people other than the person making the decision. One way to deal with such decisions is to tax them. This should, in theory, reduce the negative side effects, while simultaneously forcing the decisionmaker to bear the “true cost” of his actions. Clearly, if anyone should have to pay for this societal cost, it should be porn watchers, in the form of a porn tax. If they don’t pay such a tax, they are getting an indirect subsidy.

As it turns out, we don’t have a federal porn tax. Thus, we could say that the American government has issued a federal porn subsidy.

Obviously, that reasoning is absurd. Not only does it dubiously redefine the word subsidy, but it unconvincingly claims to be able to accurately place a price tag on every conceivable externality created by watching porn. Accepting that argument would require a nearly complete suspension of disbelief.

Yet, that is essentially the argument that a group of economists at the International Monetary Fund (IMF) just made about fossil fuel subsidies. (See PDF.)

Before we dig further, I must clarify that I am, as a general rule, opposed to government subsidies. In my ideal world, government subsidizes only the things that the free market cannot or will not provide, such as parks, infrastructure, basic scientific research, a police force, firefighters, a military, and so forth. The government should not be in the business of picking winners and losers in the marketplace, distorting our tax system with thousands of loopholes, or engaging in crony capitalism by favoring particular pet corporations.

That is why I agree with the IMF report’s (implied) conclusion that we should put an end to fossil fuel subsidies. I even believe that we should implement a modest carbon tax to encourage more energy efficient cars and power plants. However, the IMF report goes absolutely off the rails in its calculation of the “true” fossil fuel subsidy. And, predictably, too much of the media’s coverage of this report has been disturbingly free of any serious journalistic skepticism.

The Guardian, which penned the most influential coverage, began its article with an eye-popping statistic:

“Fossil fuel companies are benefitting from global subsidies of $5.3tn (£3.4tn) a year, equivalent to $10m a minute every day…”

Wow. $5.3 trillion in fossil fuel subsidies? That sounds insane. But, how do they arrive at that number? The Guardian goes on to explain:

“The vast sum is largely due to polluters not paying the costs imposed on governments by the burning of coal, oil and gas. These include the harm caused to local populations by air pollution as well as to people across the globe affected by the floods, droughts and storms being driven by climate change.”

Ah, okay. The subsidy isn’t a direct financial calculation, but is instead based on a bunch of externalities whose costs are nearly impossible to derive with any sense of believability. To give you an idea of just how much fudging exists in these kinds of calculations, a similar report issued in 2013 (PDF) concluded that the fossil fuel subsidy was $1.9 trillion. A discrepancy of $3.4 trillion should raise red flags in regard to methodology. Indeed, the authors of the IMF report included the following caveat:

“These findings must be viewed with caution. Most important, there are many uncertainties and controversies involved in measuring environmental damages in different countries—our estimates are based on plausible—but debatable—assumptions.”

Such measured language was not be found in The Guardian‘s coverage. In fact, the article did not give voice to a single dissenting or skeptical opinion, and it left out the rather inconvenient fact that the $5.3 trillion estimate could be wrong by as much as a few trillion dollars.

The Economist, on the other hand — one of a mere handful of major global publications worth reading — addressed head-on the major problem with the IMF report:

“Defining subsidies is tricky. The simplest measure is the amount of taxpayers’ money used directly to keep a price artificially low. A broader one includes the costs borne by others, such as pollution, and exemptions from taxes. The IMF uses the wider definition to reach its $5.3 trillion figure. Seen more narrowly, the cost would be $333 billion.”

Yikes. That’s nearly a 16-fold difference! A calculation based on a narrow (and more commonly understood) definition of subsidy yields $333 billion, while the expanded (and controversial) definition of subsidy (which includes the costs of externalities such as air pollution, traffic, and climate change) yields $5.3 trillion. Notably, the IMF report did not highlight the $333 billion estimate; instead, it was buried on page 18 of the report.

Now, things are becoming much clearer. The IMF authors issued a hyped report that highlighted inflated numbers and buried more conservative estimates. They knew they could get away with it because sympathetic left-wing outlets like The Guardian aren’t interested in serious journalism. And they knew that other politically motivated websites, such as Slate, would pick up the story and decorate it with utter absurdities like this: “[M]ajor oil companies like Shell couldn’t exist without their continued support from the world’s taxpayers.”

By the time more sober analysis was published, such as that found in The Economist or Forbes, the hyped version of the story had already circled the planet.